DIRECT COSTS ON SPONSORED PROJECTS

Allowable v. Unallowable Charges

Judy L. BristowDirector, Grants Management

• OMB Circular A-21

• Defines the financial framework for administering federally-sponsored research

• Describes the basis for calculating facilities and administrative (indirect) costs

• Provides a reference section for determining how to charge specific, common costs

• Should be familiar to research personnel

• Direct Charging: OMB Circular A-21, Section D.1

• “Direct costs are those costs that can be identified specifically with a particular sponsored project, an instructional activity, or any other institutional activity, or that can be directly assigned to such activities relatively easily with a high degree of accuracy.”

• “Costs incurred for the same purpose in like circumstances must be treated consistently as either direct or F&A (indirect) costs.”

• “Where an institution treats a particular type of cost as a direct cost of sponsored agreements, all costs incurred for the same purpose in like circumstances shall be treated as direct costs of all activities of the institution

• Direct Charging: OMB Circular A-21, Section F

• F.6.b(3) • Items such as office supplies, postage, local telephone costs, and

memberships shall normally be treated as F&A costs. • Direct charging of these costs may be appropriate where a major

project or activity explicitly budgets for administrative or clerical services and individuals involved can be specifically identified with the project or activity.

• "Major project" is defined as a project that requires an extensive amount of administrative or clerical support, which is significantly greater than the routine level of such services provided by academic departments.

• The salaries of administrative and clerical staff should normally be treated as F&A costs.

• Direct Charging

• Four key characteristics apply to all direct costs:

• ALLOWABLE

• ALLOCABLE

• REASONABLE

• CONSISTENT

• Direct Charging: Allowability

• Costs must be allocable to sponsored agreements• Costs must be reasonable• Costs must conform to any limitations or exclusions set

forth in these principles or in the sponsored agreement as to types or amounts of cost items

• Costs must be given consistent treatment through application of the generally accepted accounting principles appropriate to the circumstances

• Direct Charging: Allocability

• An allowable cost incurred for the benefit of only one project which can be readily assigned to multiple projects which directly benefit from the cost, or is necessary to the operation of the institution

• Relative benefits received• Approximated through use of reasonable methods• Without undue effort or cost

• Direct Charging: Reasonableness

• Reflect the actions that a “prudent person” would take• Allocable and necessary for performance of the

agreement• Consistent with ethical business practices and

applicable laws• Consistent with University policies and sponsor rules

• Direct Charging: Consistency

• Cost Accounting Standards• “Similar costs incurred in like circumstances”

• Direct Charging

• “The fact that a cost requested in a budget is awarded, as requested, does not ensure a determination of allowability. The organization is responsible for presenting costs consistently and must not include costs associated with their F&A rate as direct costs.”

• NIH Grants Policy Statement, Part II

• A-21, Section J: Unallowable Costs

• Discusses the allowability of certain types of common F&A and sponsored projects direct costs, such as alcohol and entertainment

• Should be used as a reference tool

• Direct Charging: Examples

• Principal investigator’s salary• Other, non-administrative salaries • Fringe benefits• Special equipment• Materials• Scientific supplies• Animal care costs• Travel• Lab note books

• Direct Charge Questions

• 1. Does the cost make sense for the project?• 2. Is the cost too much to pay?• 3. Is the cost allowable?• 4. Did the cost directly benefit the project?• 5. How much benefit?• 6. Does the University direct charge other costs

similarly?

• Federally Negotiated Rate Agreement

• Based on Modified Total Direct Costs• Excludes equipment (purchased, NOT leased); capital

expenditures; patient care; tuition; rental costs of off-site facilities, scholarships and fellowships; and the first $25K of each subcontract

Indirect Costs

What Factors Determine the University’s F&A Rate?

Susan Wilhelm, Director Sponsored ProgramsFinancial Administration

F&A Rates How are Rate %’s Calculated?

• OMB Circular A-21 – Cost Principles• Base year expenditures less exclusions and

unallowables.• Segregation of Expenses into Facilities and

Administrative Expense Pools.• Allocation of Expenses by Functional Activity.• Allocated Expenses divided by Base = Rate.

Facilities:Organized Research DHHS Instruction DHHS

Other Sponsored

Activities DHHS

Building Depreciation 3.2% 3.6% 1.0% 1.0% 0.9% 1.7%

Equipment Depreciation 6.0% 3.9% 0.7% 0.7% 1.1% 1.0%

Interest Expense 2.9% 1.5% 0.2% 0.2% 0.2% 1.1%

Operation & Maintenance 13.5% 12.0% 5.1% 5.1% 6.4% 2.0%

Library 1.1% 1.0% 8.1% 8.1% 1.3% 1.2%

Total 26.7% 22.0% 15.1% 15.1% 9.9% 7.0%

Administrative:

General 7.5% 9.1% 7.5%

School & Departmental expenses 15.1% 14.6% 13.7%

Sponsored Projects (Staffing in Research Office) 6.4% 6.4% 6.4%

Student Services 0.0% 8.8% 0.0%

Total 29.0% 26.0% 38.9% 26.0% 27.6% 26.0%

Administrative Cap Adjust -3.0%

Rate by Major Function 52.7% 48.0%

Off Campus Rate 26.0% 26.0% 26.0%

Other Allowability and Allocability Considerations : Cost Accounting Standards

(Appendix A)

Each Institution Shall Follow Four CAS Standards:

• CAS 501: consistently follow its established cost accounting practices when estimating (proposal costs), accumulating (incurred costs) and reporting costs;

• CAS 502: consistently allocate costs incurred for the samepurpose, in like circumstances, as either direct or F&A costs asthey relate to the final cost objective;

• CAS 505: identify and exclude unallowable costs fromproposals and claims (i.e. F&A rate proposal)

• CAS 506: consistently use the same cost accounting period for purposes of estimating, accumulating and reporting costs.

Direct Costs

• Costs that can be identified specifically with a particular sponsored project, an instructional activity, or any other institutional activity; or that can be directly assigned to such activities relatively easily with a high degree of accuracy (Section D.I)

• Examples of Direct Costs: Salary of researcher (including benefits costs)

Laboratory supplies purchased for project Technician

Facilities and Administrative (F&A)Costs (formerly known as Indirect Costs)

Costs that are incurred for common or joint objectives, and, therefore, cannot be identified readily and specifically with a particular sponsored project, an instructional activity, or any other institutional activity (Section E.I)

Examples of F&A Costs:• Salary of department administrator • Building utility and maintenance costs• President, Executive Vice President for Research, Provost, and CFOs

offices

Composition of Total Costs

A-21, section C.I.• The cost of a sponsored agreement is comprised of the

allocable direct costs incident to its performance, plus the allocable portion of the allowable F&A costs of the institution....

• Therefore, Federal sponsors reimburse the institution for the allowable costs of a project, including direct costs and F& A costs....

Assessing Whether a Cost Is Allowable or Unallowable

Generally, it is not the type of cost that determines allowability, it is the purpose and circumstance of the expenditure. Many categories of costs are allowable as a direct or indirect, e.g., salaries, travel, materials, etc.

A direct cost must be necessary for performance of the project and consistent with the institution's practices

OMB Circular A-21: Items of Selected Cost (Section J)Note: Allowability is for both a direct or an indirect cost, unless noted in description

J.1. ADVERTISING AND PUBLIC RELATIONS - Allowable only if related to

and necessary for performance of the project (i.e., disposal of surplusmaterials) or advertising for a position.

J.2. ADVISORY COUNCILS - Allowable as a direct cost where authorized by

awarding agency; otherwise as an indirect cost.

J.5. AUDIT COSTS AND RELATED ACTIVITIES - Allowable as a direct cost

when approved by the awarding agency; otherwise as an indirect cost.

J.7. BONDING COSTS - Allowable pursuant to the terms of an award.

J.9. COMMUNICATION COSTS - Allowable as a direct cost for items such as

long distance calls related to a project); otherwise an indirect cost foritems such as recurring line charges, non-project long- distance calls)

J.10. COMPENSATION FOR PERSONAL SERVICES -Allowable (note:sabbatical leave is now covered under this section as well as fringebenefits, pension plans, institution-furnished vehicles and severance

pay.

OMB Circular A-21: Items of Selected Cost (Section J)Note: Allowability is for both a direct or an indirect cost, unless noted in description

J.11. CONTINGENCY PROVISIONS - Unallowable except for self-insurance, pensions, severance and post-retirement health costs.

J.12. DEANS OF FACULTY AND GRADUATE SCHOOLS – Allowable J.13. DEFENSE AND PROSECUTION OF CRIMINAL AND CIVIL PROCEEDINGS,

CLAIMS, APPEALS AND PATENT INFRINGEMENT -Allowable, unless commenced by the federal, state or local government

J.14. DEPRECIATION AND USE ALLOWANCES - Allowable as an indirect cost

J.16. EMPLOYEE MORALE, HEALTH, WELFARE COSTS - Allowable

J.18. EQUIPMENT AND OTHER CAPITAL EXPENDITURES - Allowable

OMB Circular A-21: Items of Selected Cost (Section J)Note: Allowability is for both a direct or an indirect cost, unless noted in description

J.21. GAIN AND LOSSES ON DEPRECIABLE ASSETS - Allowable as acredit or charge in the year of the property's sale, retirement or disposal.

J.25. INSURANCE AND INDEMNIFICATION - Allowable if needed for asponsored agreement (note: malpractice insurance is allowable cost ofresearch programs only to the extent that the research involves humansubjects)

J.27. LABOR RELATIONS COSTS – Allowable

J.30. MAINTENANCE AND REPAIR COSTS - Allowable

OMB Circular A-21: Items of Selected Cost (Section J)Note: Allowability is for both a direct or an indirect cost, unless noted in description

J.31. MATERIAL AND SUPPLIES COSTS - Allowable as a direct cost as long as necessary to carry out a sponsored agreement and actually used for the performance of a sponsored agreement

J.32. MEETINGS AND CONFERENCES – Allowable

J.33. MEMBERSHIPS, SUBSCRIPTIONS AND PROFESSIONAL ACTIVITY COSTS - Allowable, except for membership in civic/community, country club, social or dining clubs are unallowable

J.34. PATENT COSTS - Allowable if required by the sponsored agreement, except for foreign patents

J.35. PLANT AND HOMELAND SECURITY COSTS – Allowable

J.37. PROFESSIONAL SERVICE COSTS- Allowable

J.39. PUBLICATION AND PRINTING COSTS - Allowable as a direct cost if the costs can be identified with a research project, and if the cost is page charges, the charges are levied impartially on all research paperspublished, not just those funded by federally sponsored authors

J.40. REARRANGEMENT AND ALTERATION COSTS - Allowable, with prior approval of the sponsoring agency

J.41. RECONVERSION COSTS - Allowable

OMB Circular A-21: Items of Selected Cost (Section J)Note: Allowability is for both a direct or an indirect cost, unless noted in description

J.42. RECRUITING COSTS - Allowable if reasonable (color ads are not considered reasonable)

J.43. RENTAL COSTS OF BUILDINGS AND EQUIPMENT – Allowable

J.44. ROYALTIES AND OTHER COSTS FOR USE OF PATENTS - Allowable if necessary for the performance of an award

J.45. SCHOLARSHIPS AND STUDENT AID COSTS - Allowable only when the purpose of the sponsored agreement is to provide training to selected participants and the charge is approved by the sponsored agency

J.47. SPECIALIZED SERVICE FACILITIES - Allowable, but rates must beadjusted at least biennially and have to take over/under applied costs ofthe previous periods) into consideration

J.49. TAXES - Allowable when the institution is required to pay

J.50. TERMINATION COSTS APPLICABLE TO SPONSORED AGREEMENTS-Allowable if for a sponsored project

J.51. TRAINING COSTS-Allowable

J.52. TRANSPORTATION COSTS – Allowable

J.53. TRAVEL COSTS - Allowable, but must be reasonable (must be lowest commercial airfare—coach or equivalent)

J.54. TRUSTEES – Allowable

Unallowable • J.3. ALCOHOLIC BEVERAGES

J.4. ALUMNI ACTIVITIES • J.6. BAD DEBTS • J.8. COMMENCEMENT COSTS• J.15. DONATIONS AND CONTRIBUTIONS• J.17. ENTERTAINMENT COSTS• J.19. FINES AND PENALTIES • J.20. FUND RAISING AND INVESTMENT COSTS - Unallowable except where incurred as a result of

compliance with a sponsored agreement or written prior authorization by sponsoring agency. • J.22. GOODS OR SERVICES FOR PERSONAL USE • J.23. HOUSING AND PERSONAL LIVING EXPENSES • J.24. IDLE FACILITIES AND IDLE CAPACITY - Idle facility is unallowable; idle capacity is allowable

as an indirect cost if reasonable • J.26. INTEREST - Unallowable, except for interest on debt incurred after 7/1/82 to acquire

buildings, major reconstruction and remodeling, or acquisition/fabrication of capital equipment costing $10,000 or more

• J.28. LOBBYING • J.29. LOSSES ON OTHER SPONSORED AGREEMENTS OR CONTRACTS • J.36. PREAGREEMENT COSTS - Unallowable unless approved by the sponsoring agency• J.38. PROPOSAL COSTS • J.46. SELLING AND MARKETING

EVPR

How much money? Less than thought or rumored

Distribution of Overhead Revenue100%

UofL Research Fdn 20%

Research Infrastructure 35%

Debt Service 11%

Scholar Program 14%

RIF's 20%

Distribution of Overhead Revenue100%

Debt Service11%

RIF's20%

Scholar Program14%

Research Infrastructure

35%

President28%

Provost10%

VPHA10%

EVPR52%

UofL Research Fdn20%

EVPR Internal Grant Program

1. Intramural Research Incentive Grants (IRIG): (Two deadlines/year, reviewed by IRIG Review Committee chaired by Dr. Jon Rieger) e.g Multidisciplinary Research Grant ; Project Completion Grant; Research Initiation Grant ; Research On Women Grant; Undergraduate Research Grants (URG); Research Undergraduate Research Scholar Grant (URS)

2. Competitive Enhancement Grant - $15,000 (Monthly deadlines, reviewed by RAC)

3. Collaborative Planning/Development Awards (Monthly deadlines, reviewed by RAC)• Planning grants: Up to $10,000 for one year can be requested to bring together faculty

whose interests fall into the same or complementary areas, but who have no prior collaborations or pilot studies that would be necessary to justify a developmental grant.

• Developmental grants: Up to $20,000 for one year can be requested for established groups who are at the point of developing a proposal to go to an outside agency. Proposals to an outside agency will be expected within one year of the award.

4. Proof-of-Concept Grants (Guidelines being expanded) Review committee composed of internal and external reviewers - $25,000/grant